News from The Globe and Mail

Zucker playing hardball with HBC suppliers

Asking vendors to assume more risk

Jerry Zucker is encouraging suppliers to take on more responsibility -- and more risk -- for how well their products fare in Hudson's Bay Co. stores.

The new American owner of HBC sent a letter to suppliers this week saying he will promote practices that could force vendors to make up for the difference between the retailer's actual sales and its targets for a product.

Under the new regime, suppliers would top up HBC profit margins if their products had to be cleared out at marked down prices.

And suppliers could end up having to accept back inventory from stores if it doesn't sell after a set period.

Mr. Zucker is urging vendors to take a bigger role in replenishing store shelves and becoming "category managers," a term that has become common under Wal-Mart Stores Inc.'s supply-chain business.

"He's trying to bring the latest hard-nosed retail practices into the Bay and Zellers," said retailing specialist Richard Talbot of Talbot Consultants International.

"It's really bringing more of a Wal-Mart model to the Bay and Zellers. In a way it was inevitable. It was just a matter of time. . . . I suspect you'll see more reluctance on the part of many of the suppliers."

Mr. Zucker is moving swiftly to try to turn around the flagging fortunes of HBC, which owns the Bay, Zellers and Home Outfitters.

He has cut eight top executives, according to insiders, and taken over the chief executive officer position from George Heller, who remains on the board of directors -- with Mr. Zucker as "governor," or chairman.

He wants to differentiate its Bay and Zellers chains by reinforcing a "top of the line excellence" at the Bay and offering "edgier" products at discounter Zellers, he said in the letter to suppliers, dated March 13.

And he wants to improve customer service, decentralize purchasing and focus more on private labels.

"As part of our strategic refocusing, we will offer you, our vendors and valued partners, the opportunity to submit proposals to better manage your shelf space in our 566 locations," Mr. Zucker wrote in the letter.

"Best in class proposals will also be given the opportunity to become 'category managers.' Consignments guaranteed, margins guaranteed, sales per square foot and other similar structures will be encouraged."

Guaranteed consignments mean that products that don't sell in the stores are returned to the supplier. (Booksellers return unsold books to vendors.) And guaranteed margins mean that suppliers are responsible for making up the difference between target and actual margins.

Category managers are companies that boast the top brand in a category; they help determine shelf space and product placement.

An official close to Mr. Zucker did not return a call yesterday, nor did an HBC spokeswoman.

Suppliers who received the letter or heard about it were nervous. They said it leaves the impression the new owner is trying to reverse HBC's poor financial results on the backs of the vendors. And they said Mr. Zucker will have to upgrade HBC's technological systems to allow suppliers to get more feedback about how products are performing, as is the case at Wal-Mart.

"This is the easy route -- squeeze the suppliers," said one supplier, who asked not to be named. "It's putting all the onus on suppliers. What it's coming down to is, they're not buying product any more, they're buying deals. . . . It's a whole different ball game."

Still, others said that many of the practices being encouraged by Mr. Zucker are more common at big U.S. retailers such as J.C. Penney Co. Inc. and Federated Department Stores Inc., which owns Bloomingdale's and Macy's.

"It reads very much like a U.S. operation that they're trying to emulate," said one supplier who received the letter. "Retail has been moving in this direction."

He said that some Canadian retailers informally ask suppliers at the end of the season to top up margins if they haven't met the company's goals.

Mr. Talbot said HBC and suppliers alike are being forced to borrow a page from the Wal-Mart book in order to better compete with the behemoth. But the risk is losing smaller, more innovative independents that offer unusual products -- and ultimately help differentiate a retailer from others, he said.